“Sustainability disputes will certainly arise”


A rise in new disputes, a need for clarity on sustainability benchmarking, and the risk unsustainable companies will be blocked from tendering…

…These were just some of the insights Nicholas Gould, Partner at Fenwick Elliott and Visiting Professor at King’s College London, shared with IG as we interviewed him about a more sustainable industry after Covid-19.

Before we talked about Net Zero, however, we had to ask the leading international arbitration lawyer about the pandemic. Covid-19 has thrown a lot at the construction industry and questions remain in some jurisdictions about liability for Covid-related delays. So, what are the prospects for disputes being managed quickly and effectively so that industry can return to stability as soon as possible?

Nicholas Gould: “Early in 2020 when the Covid-19 pandemic first began to impact construction projects, the industry was faced with a delay event that nobody had foreseen or priced for, causing a huge amount of cost.

“As would be revealed, most if not all, major construction contracts did in fact allocate this risk. Naturally the party left carrying the can may have felt quite aggrieved by this, which in turn led to many disputes and indeed the way different jurisdictions handled the pandemic could result in hugely different outcomes, primarily in respect of a party’s entitlement to costs.

“While parties would usually be able to successfully claim the pandemic was a Force Majeure event – which usually entitled them to an extension of time – it would be down to how a particular country formalised its pandemic response to determine whether they were also entitled to claim for costs as they would typically be entitled to under many standard form contracts’ ‘change in legislation’ provisions. This of course led to more uncertainty.

“Over a year and a half later, parties are very aware of the impact Covid-19 can have on their projects and are proactively and pre-emptively managing this. For instance, prudent businesses will have a contingency plan for materials and supply chains and may be able to mitigate potential site lockdowns if proper health and safety procedures that address Covid-19 transmission are strictly enforced.

“However, most importantly, contracts entered into in a post Covid-19 world will be entered into with eyes open to the potential risks and where they lie. For the most part disputes arise where contractual entitlement is unclear. Now that Covid-19 is known risk that can be mitigated disputes are likely to be managed more quickly.”

IG: One thing that the pandemic did not change, was the rising global focus on Net Zero, which is driving a huge growth in sustainable finance products like Green Bonds. This has created a powerful imperative for clients to ensure sustainable practices are enshrined in their projects. So, are construction law and construction contracts evolving fast enough to meet this need?

“Whether construction law, in respect of legislation, is evolving fast enough the answer would have to be no”
Nicholas Gould

Nicholas Gould: “The construction, operation and maintenance of our built environment collectively accounts for around 45% of the UK’s carbon emissions. However, in respect of specific law that addresses this currently there is only the Climate Change Act in the UK. Whilst this Act specifically legislates for the construction industry to work towards and achieve net zero emissions, there is practically no law dealing with this area. In terms of whether construction law, in respect of legislation, is evolving fast enough the answer would have to be no.

“Things are a little bit more promising when looking at the development of the common law. Reported case law shows that various individuals and organisations are taking action against the Secretary of State (SoS) for Transport and Highways, the SoS for Business, Energy and Industrial Strategy and other government bodies to challenge whether the Government has properly taken into account the emissions targets when approving new projects.

“Perhaps the most notable case is the Supreme Court decision of 16 December 2020 in Friends of the Earth & Others v Heathrow Airport Ltd.[1]  In that case the Supreme Court overturned the Court of Appeal’s decision that the Government had acted unlawfully by approving the Heathrow expansion project without fully considering and complying with the Paris Agreement targets.

“Where there is more adaptability and scope to incorporate sustainable practices, is of course the parties’ construction contract which can evolve as fast as parties please. Contracting to accommodate a party’s financial incentive has always been the name of the game and it’s no different in respect of sustainability objectives. If there are particular practices or outcomes that a project owner requires this is where they can most effectively be implemented.”

IG: But with new client priorities, comes new potential for disputes. Do you expect ‘sustainability disputes’ to rise?

Nicholas Gould: “Sustainability disputes will certainly arise. Disputes are more likely where parties are unclear of their obligations. It will benefit parties to be very explicit about sustainability obligations by integrating clauses that contain express provisions and targets. This is where legal leadership comes in because it is typically the lawyers who advise clients of these obligations and indeed draft them.”

“Businesses will be required to identify their carbon footprint and those not meeting current standards will be excluded from tendering”
Nicholas Gould

IG: So if standard contracts have become a great source of certainty for clients and contractors, what scope is there for establishing similar certainty surrounding clear benchmarking of sustainability outcomes?

Nicholas Gould: “As you’ve identified, much in the same way that standard form construction contracts promote certainty, there is scope for the incorporation of sustainability benchmarking requirements. I think the best way to implement this benchmarking would be in the form of standard form clauses that could be incorporated into contracts.

“Indeed we are seeing progress in this space. The European International Contractors’ Association recently held a digital workshop on the subject of Turning the 2050 carbon neutral challenge into a business opportunity for European internal contractors.[2] This provided a focus not just on thinking about the realities of planning for a net zero target for the construction industry, but also on the likely impact on contract conditions.

“In addition, the Chancery Lane Project has produced a Climate Contract Playbook, which contains a series of clauses that could be used in a variety of commercial situations, not just construction.[3]

“We may also see further incorporation of green baseline clauses possibly by reference to the Greenhouse Gas Protocol Corporate Accounting and Reporting Standards, which is currently in its 2015 edition.  Businesses will be required to identify their carbon footprint and those not meeting current standards will be excluded from tendering or, if they do not meet reduction targets over time, may find themselves in breach of a green baseline clause.

“Such benchmarking is very important, as I’ve mentioned ambiguity is a huge contributor to disputes, so clear targets and benchmarks, incorporated into contracts, could be hugely beneficial in achieving sustainability objectives in a way that minimises disputes.”

IG: And finally, while construction and engineering firms now routinely work across borders, what can be done to ensure that different concepts of sustainability in different jurisdictions are fully understood when signing contracts?

Nicholas Gould: “If we look at the international sphere, the key benchmarks are those set out in the Paris Agreement, the Framework Convention on Climate Change (UNFCCC), and the United Nations Sustainable Development Goals. These are objective targets that many states have signed up to.

“The way that these may be viewed and implemented at a state level will vary depending on that country’s specific domestic targets. However, international standard form contracts like FIDIC are uniquely placed to bridge jurisdictions. When parties enter into a FIDIC contract if they incorporate specific, target based, sustainability requirements this will go a long way to building a consistent approach across jurisdictions.”

Nicholas Gould will be leading a conversation about law and sustainability at the the Global Infrastructure Conference this weekend. The conference brings together global infrastructure leaders each year to discuss the world’s biggest challenges and how they might be addressed. Taking place on Friday 10th and Monday 13th of September, IG will be there to report on all the news that emerges.

[1] R (on the application of Friends of the Earth Ltd and others) (Respondents) v Heathrow Airport Ltd (Appellant) [2020] UKSC 52. On appeal from R (on the application of Plan B Earth) v Secretary of State for Transport [2020] EWCA Civ 214.

[2] EIC Digital Workshop, 16 April 2021 (https://www.eic-federation.eu/summary-eic-digital-spring-workshop-16-april-2021).

[3] See The Chancery Lane Project (https://chancerylaneproject.org/).